Tag Archives: oil

The post-Harvey buzz over fuels is making U.S. crude look like the poor stepchild of hedge funds.Since the storm battered the heart of America’s refining industry last month, bets on rising gasoline and diesel prices have surged for three straight weeks to the most bullish in years. But when it comes to West Texas Intermediate crude, skepticism is prevailing.It all boils down to where the supply glut is. While U.S. fuel stockpiles have plummeted — with a record draw from gasoline storage tanks — oil inventories rose as crude-processing plants in Texas struggled to get back on their feet. That’s prevented WTI from closing above $50 a barrel even though last week was the best for the U.S. benchmark since July.“The numbers are an assertion that they view the fundamentals for those markets as the strongest in years,” Tim Evans, a Citigroup Global Markets analyst in New York, said of the enthusiasm over fuels. “And that may be appropriate, given all that’s happened with the hurricane.”

Increasing crude oil production in the Permian basin of western Texas and eastern New Mexico is filling available pipeline capacity, putting modest downward pressure on West Texas Intermediate (WTI) crude oil priced at Midland, Texas compared with WTI at Cushing, Oklahoma. However, the Midland versus Cushing discount, which recently widened to more than $1 per barrel (b), is unlikely to be either as large or as persistent in 2017 as it was following the rapid increase in Permian production over 2010-14. Pipeline capacity expansions and other market changes now underway appear poised to facilitate the efficient disposition of higher volumes of Permian crude oil.Compared with other oil producing regions, the Permian has a large number of productive geological formations stacked in the same area, including the Wolfcamp, Bonespring, Spraberry, and Yeso-Glorieta formations. The Permian’s other favorable characteristics are in-region refining capacity, close proximity to large refining centers on the Gulf Coast, and existing pipeline infrastructure.Crude oil production in the Permian grew by 593,000 barrels per day (b/d) between January 2010 and January 2014, more than could be accommodated by in-region refinery capacity and pipeline capacity. This situation resulted in large price discounts at the crude gathering and transportation hub in Midland, Texas compared with Cushing, Oklahoma, indicating that the marginal barrel of crude oil was moving out of the region via a mode of transport more expensive than by pipeline. In 2014, WTI-Midland averaged a $6.94/b discount to WTI-Cushing, compared with a $1.68/b average discount the prior year. However, as new and expanded pipeline capacity was added in 2014 and 2015, WTI-Midland’s discount to WTI-Cushing narrowed, falling to an average of only $0.07/b in 2016 (Figure 1).

The 2020s could be a “decade of disorder” for the oil markets as the lack of drilling today leads to a shortfall of supply. Demand will continue to grow, year after year, and shale will not be able to keep up.It may be hard to envision today, with an oil market suffering from low prices and a glut of supply. Falling breakeven prices have drillers still churning out huge volumes of shale oil, with production in the U.S. already rebounding and rising on a weekly basis.The tidal wave of shale, however, is the direct result of extreme market tightness a decade ago, which pushed oil prices up into triple-digit territory. The rapid rise of China and other developing Asian countries in the early 2000s put the squeeze on the market, as conventional production struggled to keep up with demand. High prices sparked new shale drilling in the 2010-2014 period, which, as we now know, brought a lot of supply online. That, subsequently, led to a price meltdown.“I think that what you might take away from this historical review, is that oil is volatile. We go through periods of stability, followed by huge increases, followed by the almost inevitable downturn coming off the big spike,” The former administrator of the EIA, Adam Sieminski, said on the Platts Capitol Crude podcast on April 10. But busts in the oil market tend to sow the seeds of the next upcycle.“And we’re in that downturn kind of age now. And everybody is kind of sitting around saying ‘well, maybe shale is going to make it different. Maybe we are going to be less volatile now because shale can feed into rising demand.’ I’m thinking that the decade of the ‘20s is going to be one of difficulties,” Sieminski said. “That’s why I call it the decade of disorder. We’re not getting enough capital investment now, I don’t know that shale is going to be able to do it all.”

Energy enterprises Repsol and Armstrong Energy say they made the largest U.S. onshore oil discovery in three decades in Alaska.The conventional hydrocarbon oil was found in the Horseshoe-1 and 1A wells initially drilled during the 2016 to 2017 winter campaign in the Nanushuk, an area located in Alaska’s North Slope.

Any decision to extend OPEC production cuts past June would have to include the continued participation by the non-OPEC members of the November accord, OPEC Secretary General Mohammad Barkindo said on Tuesday.The group held talks in recent days with shale oil producers and hedge fund executives, he said during a media conference at the CERAWeek energy conference in Houston. This is the first time OPEC held bilateral meetings with shale producers and investment funds, Barkindo said.”I think we have broken the ice between ourselves and the industry, particularly the tight oil producers and the hedge funds who have become major players in the oil market,” he said in remarks on the sidelines of the energy conference.OPEC plans to hold an event to consider the impact of oil futures on physical crude markets, he said, without providing details.

IHS CERAWeek is an annual energy industry conference in Houston that tends to draw huge crowds from all over the world — this year’s conference is expected to pull nearly 3,000 attendees from more than 60 countries. Denver-based IHS Inc. (NYSE: IHS) will host the 36th anniversary of CERAWeek March 6-10 at the Hilton Americas Hotel downtown.

The decline in Bakken oil production that started in January 2015 is probably not reversible. New well performance has deteriorated, gas-oil ratios have increased and water cuts are rising. Much of the reservoir energy from gas expansion is depleted and decline rates should accelerate. More drilling may increase daily output for awhile but won’t resolve the underlying problem of poorer well performance and declining per-well reserves.

Another week, another record for U.S. crude exports.Producers and traders shipped out 1.21 million barrels a day of U.S. crude in the week that ended February 17, the most in Energy Information Administration data going back to 1993. Domestic output increased to 9 million barrels per day last week, the fastest pace since April, while U.S. refiners used the least crude since October 2015.Shale output has surged and tankers loaded in the Middle East during the last days of all-out production by OPEC nations arrived this month in the U.S., swelling stockpiles to a record. Prices for West Texas Intermediate crude have averaged $2.24 a barrel below global marker Brent this year, making U.S. oil more attractive to refiners around the world.

Citi acknowledges the headwinds in the near-term. “Oil prices are not likely to stray far from their current $53-58 per barrel range in the near term as record investor net length and bearish inventory data will likely cap prices until more tangible evidence of a tighter market emerges,” Citi analysts wrote in a recent research note. However, they see oil prices posting much stronger gains in the second half of the year.But the bearish threats to oil prices on the downside seem to be a lot more visible right now than the bullish ones. Aside from rising shale production, a dagger looms over oil prices in the very near-term. Hedge funds and money managers have pushed bullish bets to a new record high, equivalent to over 1 billion barrels of oil. The massive one-sided bet leaves the oil market dangerously exposed. When the herd suddenly realizes that they are all making the same bet, there could be a stampede back in the other direction. The buildup in bullish bets is all the more remarkable because it occurred at a time when oil prices were stagnant, stuck in the mid- to low-$50s per barrel.

Oil held above $53 a barrel, after spending last week in the smallest trading range in 13 years as investors weighed rising U.S. drilling activity against OPEC production cuts.
Futures rose 0.4 percent in New York after fluctuating in the narrowest range since January 2004. U.S. drillers boosted the rig count to the highest since October 2015, Baker Hughes Inc. said Friday. Meanwhile, hedge funds raised net-long positions on West Texas Intermediate and Brent to a record.

Oil has traded above $50 a barrel since the Organization of Petroleum Exporting Countries and 11 other nations started trimming supply on Jan. 1 to ease a global glut. While Goldman Sachs Group Inc. predicts the market will shift into deficit in the first half of this year, U.S. crude stockpiles have increased the past six weeks to the highest level in more than three decades.